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1. Power Point Slides for: Financial Institutions, Markets, and Money, 8th Edition Authors: Kidwell, Blackwell, Peterson and Whidbee Prepared by: David R. Durst, The University of Akron

2. CHAPTER 20 Investment Companies

3. Investment Funds • Purchase direct, long term, capital market securities and issue indirect, liquid, small denomination securities, called shares. • (IF) offer the financial investor the following: • Provide risk intermediation by investing in a diversified portfolio of assets. • Provide denomination intermediation by issuing shares in smaller denominations than the direct securities purchased. • Provide marketability for IF shares. • Offer economies of scale in investment management and transaction costs.

4. Closed-end Investment Companies • Have a fixed number of shares outstanding like any publicly traded corporation. • Shares are traded and priced in the market. • The net asset value (NAV) is often above the market value/share.

5. Open-end Investment Companies or Mutual Funds • Most common and dominates asset holdings. • Mutual funds stand ready to buy(redeem) or sell their shares at the current market price of assets--net asset value. • No limit to the number of shares issued.

6. Exchange-Traded Funds (ETF) • First introduced in 1989 at Toronto Stock Exchange • Shares traded on organized exchanges like closed-end funds • Created with deposit of portfolio of stock • Redemptions in form of stock portfolio • Most track stock index--SPDRs

7. Investment Trust or Unit Trust. • Assets are not actively managed. • Provide small denomination share claims against a diversified, fixed portfolio of securities. • Trust sponsors usually will repurchase shares at net asset value, less a commission.

8. Importance of Investment Companies • Investments in mutual funds exploded in the 1990s because • Many new funds were developed. • Individual Retirement Accounts (IRAs) were developed. • The shift of many pension plans from defined benefit to defined contribution plans(401k). • Increased investment by baby boomers. • The high rates of return available on common stocks.

9. Types of Investment Funds • Growth and income funds • Growth funds • Aggressive growth funds • Balanced funds • Global equity funds • Income-equity funds • Bond funds • Specialty funds.

10. Mutual Fund Families • Mutual fund managing companies market a variety of types of mutual funds to investors, called families of funds. • The intent is to provide an opportunity to change risk, asset, term and other investment profiles without changing mutual fund companies or retirement account manager. • Funds may be switched from fund to fund at nominal charges.

11. Mutual Fund Families (concluded) • Other services may include: • discount brokerage service--purchase/sale of individual direct securities, such as stocks and bonds. • Transaction Accounts--check writing and/or debit card relationship to mutual fund. • Pension fund management for businesses

12. Mutual Fund Fee Structures • Load funds--investor pays a sales commission when shares are purchased from brokers. • No-load funds--no initial sales fees, but other charges (Bank-end load, contingent deferred sales charge, or redemption fees) may be levied for services provided. • 12b-1 fees - an annual fee levied against fund assets by some funds. • Management or advisory fees • Exchange fees and account maintenance fees.

13. Hedge Funds • Hedge funds comprise investment pools that use a combination of market philosophies and analytical techniques. • Hedge funds seek to develop financial models to identify, evaluate, and execute trading decisions. • Hedge funds typically are organized as limited partnerships. • The goal of a hedge fund is providing consistent, above-market returns while reducing the risk of loss.

14. How do Hedge Funds Differ from Mutual Funds • Hedge funds are private, unregistered investment pools open to a limited number of accredited investors. • Hedge fund managers receive a fee that is based on their performance. • Mutual funds are heavily regulated investment pools registered with the SEC that are open to all investors. • Mutual fund managers receive a fee that is percentage of the assets under management.

15. Traditional Hedge Fund Investment Strategies • Traditional hedge fund strategies include: • domestic hedge strategies. • global hedge strategies. • global macro strategies. • market neutral strategies. • sector strategies. • short strategies.

16. Arbitrage Hedge Fund Investment Strategies • Arbitrage hedge fund strategies include: • Fixed income arbitrage. • Index arbitrage. • Closed-end fund arbitrage. • Convertible arbitrage.

17. Event-driven Hedge Fund Investment Strategies • Event-driven hedge fund strategies include: • Risk arbitrage. • Distressed securities. • Special situation.

18. Money Market Mutual Funds (MMMF) • Short-term money market investments. • Provide excellent liquidity for investors. • High quality and high yield when yield curve is inverse. • Compete with bank deposits.

19. Initial growth of MMMFs affected by bank Regulation Q. • When market rates were above Regulation Q maximum deposit rates, MMMFs grew rapidly. • Banks were able to compete after the 1982 Depository Institutions Act when they were permitted to offer insured, Money Market Deposit Accounts (MMDA). • MMMF offer higher yields than bank MMDA’s?

20. MMMFs’ Role in the Economy • At year end 2001, MMMFs had over $2 trillion worth of shares outstanding. • MMMFs offer transactional conveniences that make them very competitive with bank deposits. • Check writing privileges, debit cards, wire transfers, sweep features. • MMMFs that invest in tax-exempt securities can pass through interest payments that are exempt from federal (and possibly state) income taxes. • Interest earned on bank deposits is fully taxable.

21. Real Estate Investment Trust (REIT) • An investment fund selling shares and investing in real estate related assets • Own income property. • Acquire mortgages. • Finance real estate development and construction. • Acquire and lease property.